I’m planning to get my taxes done by a professional in a few weeks (after I’m fully vaccinated) but I want to make sure I have all the information I need beforehand.
My mother died last February. The title to her house was transferred to me and my two siblings in July. We sold her house a week later and split the proceeds (about $20,000 each). I have a 1099-S and other papers from the closing. I know the proceeds and the selling costs but I don’t understand where I get the fair market value number to determine if this is a capital gain and if I’ll pay taxes on it. Any insight on this will be really appreciated.
Depending on where you live you may not have to pay any taxes:
The federal government does not have an inheritance tax. The six states that impose an inheritance tax are:
Iowa
Kentucky
Maryland
Nebraska
New Jersey
Pennsylvania
Of course, state laws are subject to change, so if you are receiving an inheritance, check with your state’s tax agency. The tax rates on inheritances can be as low as 1% or as high as 20% of the value of property and cash you inherit.
True but the Federal government does have an estate (death) tax that should have been paid (if the estate were over $11.58M) by the executor. Not an inheritance tax per se but still a consideration.
Thanks for your reply. I looked at your site and it includes the same thing I’ve found everywhere:
What I’m trying to ascertain is how I find the “fair market value” of the property. We didn’t have it appraised. We did no improvements and sold the property “as is”. So how do I determine what the FMV is?
It would seem to me the fair market value is what you sold the house for. Unless you let it go for a pittance or somehow got way over market value the sale price would seem to be the thing. Banks will not give mortgages that are way out of line with FMV which they determine by the sale prices of similar properties in the neighborhood. Presumably, when you went to sell the house, you had someone advise you on a fair price to ask for which would be the FMV.
So, contact your bank and ask them. There may be a fee for that.
Also, I would assume there are property taxes on the place which would assume the city (or whoever) assessed the FMV for the property in order to tax it. So you might also check with the city and see if they can tell you.
You could also ask a real estate agent to find it out for you. Again, I would expect to pay a fee for the service.
Your accountant could probably tell you where to find that number.
If it were an “arm’s length” sale. That is, you didn’t negotiate an “unfair” deal with a relative or something, then what you sold for is the fair market value.
“Fair market value is the price that your home or other assets would sell for under normal market conditions.”
Since you sold it right away, the FVM is typically what you sold it for. Figuring out FMV gets more complicated if you hold onto the house and then sell it years later. When you sell years later, you have to know the FMV at the time you inherited the house so you can calculate sales price minus FMV to know what your profit is. But since you sold right away, FVM and sales price should be the same thing.
The buyer paid cash and it was $11,000 over asking price. (There was a bidding war.) The house is in a poorer area that doesn’t see a lot of turnover these days since a good many of the houses have been bought as rental properties. I was actually surprised that we got as much as we did for it.
I do have that information but our realtor told us that that is not really a good indicator for how much a house is worth. And it was about $20,000 less than what we sold it for. I’m ok with using that, though, if that’s what the IRS will accept.
I’d consult a tax professional - but if it was acquired and sold within 6 months, you could just set the “alternate valuation date” to the date it was sold and have no capital gains. The purpose of the rule is to tax people who sit on a property and wait until it appreciates to a much higher valuation and selling. That’s not what happened here.
You should talk to your accountant about how to establish and document the fair market value at the time of your mother’s death. The truth is though that there was only a short period of time between the death and the sale. The best evidence of the fair market value of your property is the price at which you sold it a few months later in a bona fide arm’s length transaction. I suspect the IRS wouldn’t question the sale price as the fair market value for even a moment.
Alternative methods include getting estimates from a few real estate agents or hiring a professional appraiser to assess its value. It’s probably too late to get the opinions from multiple real estate agents since they can’t see the property. You could at least get whoever your listing agent was to write up a little report on how she came to the listing price, hopefully supported by a list of comparable properties. You could hire an assessor but since she can’t see the property now in any event, she’s going to have to depend on the information you give her about the property. To wit…
I would keep any information you have about the property that might support its value in a folder. A copy of the plat, a description of the property (age, construction materials (brick? wood? stucco? stone roof? etc.) square footage, no. of bedrooms andbathrooms, mechanical systems and their ages, improvements, overall condition, etc.), and pictures of the property if you have them. The pictures from the listing would be probably be great, particularly if they show the house without any improvements you may have made following your mother’s death. If your accountant thinks you need a formal appraisal, the appraiser can rely on this information to determine comps.
You should also keep records of the cost of any repairs or improvements you made after your mother died. Technically, this doesn’t go to the fair market value at death (which was your question) but it does contribute to the property’s cost basis. Ultimately, your capital gain, if any, will be a function of this cost basis rather than just the value at your mother’s death.
Thanks to everyone who has responded. This is a big help. At least now I have a better idea of how this works. I didn’t want to go to the tax preparer with no clue.
We inherited our folks CA house during the real estate downturn. We waited about 7 years to sell, and did realize a substantial capital gain when sold the home.
We had neglected to get an appraisal at the time of death, (our fault, as we didnt know if we were going to keep the house, or rent it etc etc)…but were able to get a “retrospective appraisal” from our realtors using similar homes sold in the time period when we inherited the home. CA state accepted it, as did the IRS…but the whole thing was a bit of a mess for us as we did it ourselves. Four siblings.
We wanted to have max value of the house sales wise, but minimal value for tax purposes, but it worked out to where the figures (real and appraised) were about the same. Honesty being the best course of action with state and feds!
Tired and Cranky’s post above is very informative and spot on.
